BNP Paribas and Citigroup analysts wrote in research notes last week that it is unlikely to see another steep devaluation of the EGP before the end of this fiscal year in June, according to Bloomberg
Analysts at both banks say the USD-EGP rate will likely remain unchanged over the next six weeks as policymakers look to keep borrowing costs and inflation in check while we wait to secure more FX from abroad.
Since mid-March, the USD-EGP exchange rate has stayed stable at 30.96, despite three devaluations that have led the EGP to nearly half in value compared to the greenback.
“Egypt may now be looking to allow a gradual EGP depreciation after it secures foreign investment flows and the second IMF tranche — to mitigate the risk of a disorderly exchange rate correction,” wrote Mohamed Abdelmeguid, BNP Paribas’ senior MENA economist. The bank had previously expected the EGP to fall to 34.00 against the greenback by the end of June. The CBE might also hold out for “bumper tourism” revenues of about $14 bn before opting for an FX adjustment, Bloomberg cites Citigroup as saying in its note.
? BNP Paribas no longer sees another EGP devaluation as “a strict condition” to unlock FX inflows from the Gulf. The successful sale of state-owned Paint and Chemical Industries (Pachin) to Dubai-based National Paints Holding (NPH) earlier this month “suggests that earnings and exports potential of Egyptian companies is enticing to some buyers — with or without a devaluation,” according to Abdelmeguid.
Furthermore, a further depreciation could push up the government’s debt bill, leading Moody’s to act on its threat last week to downgrade our sovereign credit rating, Abdelmeguid wrote. Higher borrowing costs would also make it more difficult for the government to hit its 6.4% target for the budget deficit this fiscal year, Citigroup noted. BNP Paribas also thinks that a sharp narrowing of the current account deficit in 1Q FY 2022-2023 — thanks in part to a lower imports bill — makes a further devaluation less urgent.
The EGP has in recent weeks been regaining value against the USD in the one-month non-deliverable forwards (NDFs) market, suggesting traders are pulling back from wagers of another devaluation in the short term, according to Bloomberg. One-month NDFs had the USD-EGP rate at around 32.90 on Thursday, from a record high of 35.30 on 25 April.
BNP Paribas “gauged a broad agreement amongst the major [Egyptian] banks that the central bank is likely to hold off from another devaluation until after sufficient inflows from the GCC are secured,” Abdelmeguid wrote.
A delay, not a halt: Twelve-month NDF contracts have climbed to 43.30, suggesting investors think the EGP still has a long way to fall against the USD over the next year. Moving to a flexible FX rate is a key condition of our USD 3 bn loan agreement with the IMF, and a senior Fund official said earlier this month that they believe the country is “serious” about making that shift.
